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RUSSIA


  
   

REPUBLICAN REFERENCE

Area (sq.km)
17,075,400

Population
145,470,197

Principal 
ethnic groups 
Russians 82%
Tatars 3.3%
Ukrainians 2.7%

Principal towns 
Moscow (capital)
St Petersburg
Novosibirsk 
Nizhni Novgorod 
Yekaterinburg 
Samara 

Currency 
Rouble

President 
Vladimir Putin

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Background:
The defeat of the Russian Empire in World War I led to the seizure of power by the communists and the formation of the USSR. The brutal rule of Josef STALIN (1924-53) strengthened Russian dominance of the Soviet Union at a cost of tens of millions of lives. The Soviet economy and society stagnated in the following decades until General Secretary Mikhail GORBACHEV (1985-91) introduced glasnost (openness) and perestroika (restructuring) in an attempt to modernize communism, but his initiatives inadvertently released forces that by December 1991 splintered the USSR into 15 independent republics. Since then, Russia has struggled in its efforts to build a democratic political system and market economy to replace the strict social, political, and economic controls of the communist period. 

Update No: 266 - (27/02/03)

The Russians are not feeling at all happy about things. The economy has done well over the last few years because of high oil prices. The last thing Russia needs is a steep fall in the price of oil. But a halving of oil prices from US$30 per barrel is very much on the cards if the US victory in Iraq duly arrives, as few doubt it will.
The predicament is the graver because Russia's other great export earner, arms (which jumped US$1.1bn to US$4.8bn in 2002), is likely to be less of a money-spinner in 2003-05. Russia's arms clients' base is almost certain to shrink, since its ability to develop new high-precision weapons, "the weapons of the future," is not remotely in the class of the US. One angle of the coming war in Iraq is highly cynical, but is undoubtedly correct - it will be a magnificent air show to advertise the latest US weaponry. 

The US loses interest
Putin personally has been piqued by the sidelining of his relationship to Bush in recent months. The first meeting with the US president in Ljubljana in Slovenia in June 2001 seems a long way away. They got on well at the time, the head of the West and the head of the quondam adversary, the East or communism, musing about their likely roles in history.
Then came 9:11 and everything changed. Bush became a wartime president and has remained such ever since, his security adviser, Condoleezza Rice, reminding him of it if he is ever likely to forget. At first Putin was still very important. His approval of US deployment in Central Asia and then the Caucasus to hunt down al-Qaeda was deemed vital to its success. Still, Bush must have been told of Putin's initial attempt on September 12th - 14th to persuade Central Asian leaders not to allow the US in. He was prepared to overlook it because it was so completely unavailing. For after all it was a natural reaction for a Russian leader. Bush and Putin could still stand shoulder to shoulder against terrorism once this episode was over. And then there was the question of oil. Russian and Central Asian oil seemed the saviour for the US for a while.
Not so much any longer. The Bush Administration has another strategy now. It is not going to just give up on the Middle East and turn to the north east. Far from deeming it unstable, the idea is to destabilise it, first by ridding Iraq of Saddam and then promoting democracy throughout the Middle East. Iraq has as much in oil reserves as Russia and Central Asia combined. Turning on the Iraqi taps again, easier said than done, could bring prices right down and provide the alternative supply to Saudi Arabia. No need for Russia.
In the build up to the war against Saddam, Bush still needs Putin on board in so far as he thinks a second UN resolution necessary. But the answer is he doesn't very much. He is going along with it to please Blair as much as anything else, knowing it would help him domestically. Neither the UK, France or Russia has used their Security Council veto in thirty years. It is just possible that France will do so now, but to no avail; the war will proceed. The UN is not the forum of the new world order unfolding, at least not very effectively so.
Putin feels left out of things; with Bush appreciating his new totally loyal friends, Aznar of Spain and Kwasniewski of Poland, as well of course as his old ally Blair, a lot more than Putin. As Washington would be well aware, Putin has been fishing in French and German waters lately. He is taking their side in the dispute over the timing of going to war. He does not seem to realise that the whole UN inspections rigmarole about weapons of mass destruction is about offering a pretext for intervention and no more. As far as the Bush team is concerned the real smoking gun is the only weapon of mass destruction around in Iraq that must be totally dismantled, Saddam Hussein himself. The matter cannot in diplomatic parlance be quite put like that naturally. But that is what 'regime change' means.
Putin would have been better to steer clear of the French-German alternative plan which is just Chirac and Schroeder playing domestic politics. Bush has one undoubted gift as a politician - polarisation. He not only polarises issues starkly; he ensures that others do so too. He brings things to a head for the US and for others. Putin finds himself no longer quite so necessary to Washington, while Blair finds himself still necessary, but as an ally against the French and Germans, alienating the UK from the EU. 
Bush, an evangelical Protestant, believes mightily in the New Testament precept: "He who is not with you is against you." A country is either totally loyal - or it is dropped. That is virtually what has happened to Putin.

Post - Saddam world
While Putin has decided chagrin at losing his US 'friend' he is mightily flattered by the attentions of President and Chancellor Schroeder. The trouble is Putin can do far more for them than either of them can do for him. Russia lends global status to their parochial ploy of trying to drag out the pre-war hide and seek game played by Iraq. The US is having none of it and is none too pleased at Russia going along, especially at what looks like trying to split NATO.
As for Germany it has lent Russia a lot of money (and it knows it is not going to get it back) for the privilege of having East Germany. It has lost interest by and large in the Russian market. France is not that interested in Russia either. Putin has made a miscalculation here. He would have been better to have stuck to the US and the UK, with plenty of investors still taking Russia seriously. He simply could not resist cutting a dash on the world stage, the besetting vice of leaders of declining powers, as anyone British has been able to observe for half a century or more.

The biggest oil deal ever
BP has taken the plunge into Russia in a big way. It is investing US$6.8bn (US$3bn in cash, the rest in three lots of shares over three years) in Russia's third biggest oil company, Tyumen Oil, taking a half share of its portfolio, the other half being owned by Alfa Group. The intriguing question is if the deal isn't also a backdoor entry into Iraq. That would certainly seem to be the logical explanation at a time like this.
The Iraqi angle to the affair is obviously immensely important; otherwise it appears a most perplexing, indeed, perilous move for BP, which has had its fingers burned in Russia before. In 1997 BP made its first foray into Russia, buying a 10% stake in Sidanco, a Siberian oil company, and appeared to swiftly lose its all in a rigged bankruptcy procedure. Those were the days when Russian businessmen took it for granted that the usual Western talk about 'mutually beneficial relations' was just a front for mastery in a zero-sum game, which they had been taught by Marxism was all that capitalism was about. BP were able to get the matter put right by going to the Kremlin. Sidanco is once again within their repertoire.
The mentality of the Russian mega-tycoon has changed since the 1990s. It is recognised that capitalism is a more sophisticated affair than Marx envisaged. Both sides can benefit if only the deal is sound enough. But does the BP-Tyumen deal fulfil that requirement?

The central conundrum
The Russian government is insisting upon a fixed tariff rate of tax per barrel of oil whatever its price. Hence if the price of oil falls below a certain point it could have devastating effects on the profitability of its extraction and production.
Everyone is now expecting a US victory in Iraq and therefore a much lower oil price within a few years. Perhaps only a half of its present US$30 or more per barrel. That could wipe out any profits from BP's Russian operations. This is why Standard & Poor's, the rating agency, at once signalled a 'negative outlook' for BP's long-term credit rating. It is feared that "Russia's tax regime, which charges a fixed price per barrel, could cause BP serious problems in the event of a lower oil price. It could find itself paying more than 100% in tax."
Investment is of course all a question of risk; but a risk of these proportions? What is behind this importunate affair?

Portent of the future
On the Russian side it is imperative that this deal works. The very fact that one of the world's largest firms committed itself once before, causing problems and has done so a second time has to be vindicated or nobody will come in. If necessary, the fixed tariff of the tax regime will have to go, or be relaxed temporarily in BP's favour.
BP is far from being the only major trying to break into Russia. TotalFinaElf is considering whether to invest US$3bn into an oil and gas field in Eastern Siberia; while Shell is mulling over an US$8bn project on frozen Sakhalin Island north of Japan. There are numerous other Western firms showing interest. What happens to BP in its Russian adventure is of more concern than just its future share price.

Russian maverick
The key figure on the Russian side is Mikhail Fridman, the 38 year-old head of BP's partner, Alfa Group, owning one half of the shares. He is the third richest man in Russia. He started out as a theatre ticket tout on the streets of Moscow, but swiftly made his fortune in the heady days of the 1990s sales of state property. He is tied to the new venture for the next four years.
Doug Rohls, an analyst with the intelligence group in Moscow says: "Mikhail Fridman and the Russian shareholders will continue to have the ear of Vladmir Putin and considerable influence in the halls of power. They have a deep interest in seeing the company succeed." That is the rub.
Fridman has a business history that would embarrass any Western tycoon, it is replete with alleged vote rigging, bribery and bankruptcies. Alfa is facing a US$3bn claim against Tyumen alleging involvement in racketeering during the heady 1990s and the "illegal takeover" of Yugraneft, a Russian oil rival.
In a recent interview Fridman articulated his philosophy of business as follows: "Everyone lies. Russians lie. They may lie more, others may lie less; but that's a difference in quantity, not quality." This is hardly the way say an executive of BP would put things. Fridman seems never to have heard of Hegel's dictum of the transformation, after a certain critical point, of quantity into quality. Once that critical mass of lies has been reached the outcome is thoroughgoing mendacity. BP beware.

The Iraqi oil bonanza
So why is the British major so persistent with the deal? Clearly it has its sights on Iraq, where the Russians have long had special leverage. The Russians are bound to obtain a large share of the contracts coming out of Iraq after Saddam goes. There is speculation that the country will have as much as 300bn barrels of oil in reserves once modern techniques of exploration are applied (which have been absent since 1990). It may take time for Iraq to rival Saudi Arabia and Russia on around six million barrels of oil output daily, but that time will come, changing the parameters of the world oil industry out of all recognition. BP wants to be part of the action.
The coming war may be about more than merely oil, but among other things it is about oil. The liberation of a repressed people from a ghastly tyranny is one thing. But, as John Paul Getty Jnr once said: "The meek shall inherit the earth, but not the mineral rights."
Few doubt that a veritable bonanza of Iraq oil is impending. The only question is 'when,' not 'if.' The stakes are unimaginably huge. Nothing less than a complete redirection of the world oil industry is being contemplated and is about to be implemented. Russia fits into the equations in a crucial fashion. 
Russia is the one country that has had a longstanding relationship with Iraq, training a lot of its officers, its oilmen and its elite technicians for years back. Ex-premier Yevgeny Primakov, a fluent Arabic speaker, is the heavyweight contact here, with decades of KGB experience in handling the Iraqis. He is certain to be called on again in the post-Saddam era.
The Iraqis profoundly distrust the West, as BP well knows. They have a marked aversion to the Americans and the British in particular for obvious historical reasons, whereas the Russians never meddled and interfered with them in the same way. Moscow is seen as a friend and the Russians, as in Serbia, are esteemed and preferred to android Westerners, as they appear to many. A partial exception is made for the French, always willing to trade without restrictions of any sort or moralising humbug, unlike the Anglo-Saxons. The Americans will demand and get a large share of the pie, naturally, but the UK is likely to lose out in the carve-up unless its firms manoeuvre adroitly, just what BP is doing.
The tie-up with Tyumen, that is basically with Fridman, means high level leverage in Iraq as well as Russia, with Putin himself putting his weight behind any future deals. Putin said in Paris in early February that the agreement between BP and TNK shows that Russia is a good place for investments. He cited the deal between Alfa Group and Access - Renova (AAR) on the one hand and BP on the other as crucial at a meeting with French business leaders, saying that "it could inject US$7-10bn into the Russian economy." "I also know about other plans of this kind," he added.
LUKoil of Russia and TotalFinaElf of France have already secured options on one quarter of Iraq's total reserves of 115bn barrels of oil, using the lowest estimates. That translates for the pair into an extra 30bn barrels to their long-term portfolios. Tyumen executives are convinced that there is plenty more and plenty enough for them. As one OPEC senior adviser put it: "BP would be able to exploit the Russian -ness of Tyumen, and the fact that Iraq would see itself as dealing with familiar faces, and not all - conquering Brits." Exactly; imperialism by proxy, nonetheless.
Actually LUKoil has burnt its boats, negotiating a deal with opposition forces, involving financial transactions, which got to the ears of Saddam Hussein, whereupon it had all its contracts cancelled. But it reckons it is backing the right horse, which it almost certainly is. So is BP.

Oil giant in the offing
Russian analysts said that BP will become the world's biggest oil company after buying the TNK shares. BP has been having difficulties lately and has had to reduce its upstream activity, selling reserves in Alaska. Valery Nesterov of Trojika Dialog said: "BP oil production grew by just 1.8% on average in 2000-2002. Profits have fallen, upsetting shareholders. So the TNK acquisition will do much to improve the situation."
In addition, TNK, in alliance with BP, will become Russia's third biggest oil company, relegating Surgutneftegaz to fourth position. The growth in production of up to 59m tonnes of oil would be achieved by Sidanco, which BP and TNK jointly own, Nesterov said.
Erkin Nursurov of NikOil said this is a "strategic growth decision for BP." "The oil reserves of Russian companies are much cheaper than those of Western companies if capitalisation is converted into reserves," Nursurov said.
AAR was advised in this transaction by Goldman Sachs and Alfa Bank, with Jones Day providing legal support. As reported earlier Renova, together with Alfa Group, owned 97% of TNK. The Sidanco charter capital is split as follows: Alfa Group and Access/Renova - 56%, BP - 25% plus one share, structures affiliated to Sidanco - 16% and minority shareholders - about 3%. The largest Russia Petroleum shareholders are BP (32.95% of shares), TNK (29.11%), Interros (25.71%) and the Irkutsk Regional Property Fund (11.66%).
The Russian oil industry is going to play a big role in meeting rising world demand, which should reach 90m barrels per day by 2010. Russian oil output is rising rapidly and should overtake Saudi Arabia's seven and a half million barrels daily fairly soon; in some estimates it has already done so.
In a recent issue of Foreign Affairs, Edward Morse and James Richard argue that "Moscow is poised to assume a far more significant position in the world petroleum sector than ever before." Russian companies are going global, unlike the national monopoly concerns of nearly all OPEC states. That is the meaning of the BP-Tyumen deal. It is part of a trend that has seen Vagit Alekperov, head of LUKoil, float his company on the London Stock Exchange recently. The idea is to tap into Western funds and techniques to restructure and modernise the Russian oil industry, shedding maladroit Soviet methods and adopting saner international practices. Profits are to be re-invested to expand capacity and to enhance efficiency. The days of Russian oil mega-power, LUKoil, Yukos and now BP/Tyumen, are here.
The BP deal means that the British company will be renovating some of the prized assets of Russia's oilfields, such as the giant Samoltor field in Siberia, which are waterlogged from the old Soviet technique of pumping in as much water as possible to hit production targets. BP will bring in modern technology to rescue the field and bring it up to Western standards.
BP will be aiming to export the oil from Siberia, domestic oil prices in Russia being one quarter of international ones. But exporting has its problems, as the tanker disaster of the Bay of Biscay last autumn showed. The tanker in question, the Prestige, lacked a double hull, as with so many Russian tankers, and was almost certainly leaking Tyumen oil into the seas, when it went down. BP's 'green' policy is likely to be tarnished by association with its Russian partners. But the stakes are too high to be left alone. Lord Browne, BP chairman, is known to like big bites. Well he has certainly got one now and turned BP into the world's largest company, oil or other, in the process.
The outcome should be a world profile that will ensure oil supplies to China, Korea, Japan, to the Asian tigers, to India and the Philippines, to Europe and to the US and Canada. And one should never forget that in addition Russia's gas output is greater than Europe's and North America's combined, plus Saudi Arabia and Norway. Russia is the booming energy colossus, right there with Saudi Arabia and soon with Iraq.

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AGRICULTURE

Russian minister promises help to farmers to boost grain production, exports


Russia is potentially able to produce 100-110m tonnes of grain per year, Deputy Prime Minister and Agriculture Minister, Aleksey Gordeyev, told reporters, Prime-TASS News Agency has reported.
Last year, Russia produced 86.5m tonnes of grain, or 1.5 per cent more than in 2001. "Farmers are able to increase production by 30-40m tonnes, if they are given the required stimulus," Gordeyev said. He said the government would aid farmers through restructuring of their debts and provide investments for the construction of new grain elevators.
Gordeyev said Russia would be able to export about 20m tonnes of grain, if production increased to the required level. "Unlike oil or gas, grain can be renewed every year, which is very important for the domestic economy," he said.
According to market analysts, Russia's total grain exports in the 2002-03 marketing year (July-June) could reach 15m tonnes, doubling the 2001-02 volume of 7.2m tonnes.

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AUTOMOBILES

Avtovaz, GM consider new joint project

Avtovaz and GM are negotiating a new joint project and will probably finalise their decision in late February or early March, a spokesman quoted Vladimir Kadannikov, chairman of the Avtovaz Board of Directors, as saying. "Different forms of cooperation are being considered. A meeting with GM President, Rick Wagoner was planned for late February or early March and the crucial decision on whether this project will be implemented or not will be made then," Kadannikov, also a GM-Avtovaz board chairman, noted. The GM-Avtovaz joint venture, which began turning out Chevrolet-Nivas last autumn, announced its intention to expand the range of vehicles it assembles, New Europe reported.

Ford may expand model range of cars made in Russia

US giant, Ford Motor Company, may decide in June on the expansion of the model range of cars manufactured by its subsidiary in Vsevolozhsk in the Leningrad region, Ford Russia President, Henrik Nenzen, said, Interfax News Agency reports.
He said different options are being considered, including the production of an off-road vehicle. He added that in the future, the Vsevolozhsk plant might manufacture cars of other foreign brands owned by Ford. However, it is possible that the model range will not be expanded and the plant will concentrate on making Ford Focus cars. Ford opened the plant in Vsevolozhsk last summer, and in October announced the beginning of official sales of its production. 
Nenzen said that in 2003, 15,000 cars are expected to be made in Russia, while overall Ford Motor Company sales should run to 18,000 cars. In 2004, the plant in Vsevolozhsk is planning to turn out 21,000 Focus cars, and total sales are expected to soar to 25,000 units. Nenzen said that in the near future, the plant is expected to start working in two shifts, which means 500 new jobs will be opened. At the moment it has a production personnel of 580 workers. On January 1st, 2003, Ford had 6,400 pre-paid contracts for car deliveries to Russia.

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AVIATION

Aviastar, Air China discuss airliner deal

Aviastar SP started to discuss a supply deal for five Tupolev Tu-204-120 airliners with China's Air China and CSG on January 23, Interfax News Agency has reported. Officials from Tupolev, Aviaexport and the Interstate Aviation Committee were involved in the talks, as was a representative of Egypt's Sirocco Airspace International. Sirocco's Russian division, Sirocco Airspace Russia, controls 26% of the shares in Aviastar. 
The purpose of the talks was to detail some of the conditions for the supplies. The aircraft, with their Rolls-Royce engines, should be supplied under a general agreement signed on November 29th, 2002 by Aviastar and Sirocco Airspace International.


Sukhoi to repair, service Polish airforce planes

Russia's Sukhoi military aircraft corporation has signed contracts with Poland's WZL-2 (Bydgoszcz) and WZL-4 (Warsaw) aircraft plants to repair and service SU-22M4 and SU-22UM3K aircraft supplied to the Polish Air Force, Sukhoi Deputy CEO, Alexander Klementyev said.
The contracts have been sanctioned by the Polish Defence Ministry and the Russian committee on military-technical cooperation with foreign states, New Europe has reported. On behalf of Russia, Klementyev signed the contracts. Poland was represented by the directors of the plants concerned, Colonel, Jan Zuk (WZL-2) and Colonel Jan Petrowski (WZL-4).
"This is one of the first contracts Sukhoi signed after having been granted the right for independent foreign-trade operations concerning delivery of spare parts and maintenance of earlier exported aircraft," Klementyev said. Both Russian and Polish parties highly appreciated the contracts, he added.
In particular, the parties emphasised that these contracts had terminated a period of uncertainty in this sphere, and provided a legal basis for operations that will now by performed by the designer and producer of the aircraft. Klementyev said that this progress was due to the great political work done before. "This is undoubtedly related to better cooperation between Russia and NATO and to the results of Russian Defence Minister, Sergei Ivanov's visit to Poland last year," he said.
The contracts stipulate comprehensive servicing of the whole SU-22 fleet, which the parties think will increase their flight time, diminish the operational cost of the fleet and the cost of servicing operations. Russian specialists can offer Poland all the experience Sukhoi gained in recent years, when Poland employed other contractors, Klementyev said.
He added that the sides exchanged opinions on whether it was expedient to upgrade these aircraft and to engage third-party contractors. The Russian company said it was ready to talk on these issues under the auspices of the Rosoboronexport state-owned arms trader.

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DEFENCE INDUSTRY

Two more Russian defence plants granted foreign trade permits

The state-owned enterprises Splav in Tula, and Kvant in Velikiy Novgorod, have been given the right to engage in foreign trade on their own to sell defence-industry products, Nikolay Yenderyukov, press secretary of the Russian committee for military-technical cooperation, told the ARMS-TASS Military News Agency correspondent Nikolay Novichkov on 4th February.
In accordance with a resolution of the committee for military-technical cooperation signed on 4th February, the two enterprises have been given the right to export spare parts, training materiel, and auxiliary equipment for military products previously exported, as well as to provide maintenance services for them. 
A total of six enterprises are now allowed to trade in products to be used for military purposes. The other four enterprises are Pribor, Salyut, Rubin and Sukhoi.


Russia sells US$4bn worth of military hardware abroad in 2002

Russian state arms exporter, Rosoboroneksport's, equipment sales rose to US$4bn last year while total revenues reached US$4.3bn, General-Director Andrey Belyaninov said in an interview with the 'Vedomosti 'business daily newspaper on 3rd February.
In 2001, Rosoboroneksport exported equipment worth US$3.2bn while its revenues stood at 4.2bn. Belyaninov also said Rosoboroneksport plans to increase naval and air defence equipment exports in 2003. The company therefore expects that military aircraft exports, which currently dominate sales abroad, will play a less important role in the company's export structure, Belyaninov said. 
Currently, 75 per cent of Rosoboroneksport's sales are military aircraft, while sales of weapons and equipment for land forces constitute about 15 per cent and naval and air defence equipment exports account for 6 per cent and 4 per cent of exports respectively, he noted. 
Meanwhile, small contracts, those worth less than US$50m, accounted for 95 per cent of all Rosoboroneksport's contracts in 2002, Belyaninov said. Under one such contract Russia supplied vehicles worth US$16m to Uruguay, beating competitors such as DaimlerChrysler and Renault, he added. 
Belyaninov also said military equipment worth US$300m was exported last year in the form of payments on the state's foreign debt. Russia must pay US$17.3bn on its total foreign debt in 2003. It stood at US$149.7bn as of 1 October 2002.

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ENERGY

Central European giant drills into Russia


The largest oil company in Central Europe, Hungarian oil and gas company MOL, will start developing the Zapadno-Malobalyk deposit in the Khanty-Mansi autonomous area on a parity basis with Russia's YUKOS. The Hungarians will pay US$100m to buy into the joint venture, reports the Russian Mirror.
The Russian company's cooperation with MOL will be the first time it has developed a deposit in Russia with foreigners.
The two companies will each invest about US$300-US$350m in the project, where an estimated 23.5m tons of resources lie. The field is expected to yield 1.3m tonnes of oil this year. After the Hungarians arrive in the Nefteyugansk region, the volumes of oil produced at the Zapadno-Malobalyk deposit are expected to double to 55,000 barrels a day by 2005.
Most of the oil will go to a MOL refinery in Hungary. That country's own oil reserves are very modest and meet only a fifth of requirements and, at the moment, MOL purchased most of the rest, over 5.5m tonnes annually, from Russia.
In 2001 YUKOS produced 75% of Russian oil supplies, turning in a profit of approximately US$800m. 
The agreement between MOL and YUKOS was signed two days after the agreement on the Druzhba-Adria oil pipeline had been signed in Zagreb, Croatia.
A significant part of oil transported via this unified channel will be oil from the Russian-Hungarian joint venture in the Khanty-Mansi area.
But the Druzhba-Adria pipeline's throughput capacity will significantly exceed the YUKOS-MOL joint venture's output already in 2004, and is expected to increase from five to 15m tonnes a year.
There is no doubt the Druzhba-Adria pipeline will not only provide raw material for Hungarian refineries, but will also give Russian oil companies, first of all YUKOS, an opportunity to export their oil via a deep-water terminal in the Croatian port of Omishal.

Russia proposes boosting Baltic pipeline's capacity

The Russian Ministry of Energy has submitted to the government a proposal to boost the carrying capacity of the Baltic Pipeline System to 30m tonnes per year with a subsequent increase to 50m tonnes.
Interfax News Agency quoted a source close to the government as saying the proposal has not been agreed either with the State Construction Committee or with environment protection agencies.
Transneft company is reported to have drawn up proposals for the government to hike the pipeline's capacity as part of a second stage to 30m tonnes. According to Transneft's Vice President, Sergei Grigoryev, building a Baltic Pipeline System-2 would cost roughly US$1bn. System-2 is planned to be constructed on credits from both Russian and foreign banks. 
In keeping with an earlier plan, within the framework of System-2, the pipeline's capacity was to be hiked from 12m tonnes to 18m tonnes per year. The construction cost was estimated at 9.85bn roubles. The Baltic Pipeline System is intended for pumping oil from the Timano-Pechyora and West Siberian oil and gas-rich provinces. The first stage of the system was unveiled in December 2001. System-1 cost over US$500m to construct.

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ENVIRONMENT

EU launches waste disposal project in Russia's Baltic exclave

The European Commission began on 28th January to implement its waste disposal project in Kaliningrad Region of Russia, designed to improve the existing system and to bring it in line with the standards of the European Union, ITAR-TASS News Agency has reported.
First secretary of the European Commission's office in Russia, Magnus Ovilius, stated on 28th January, while presenting the project to the regional administration, that the cost of the project, which is to be financed by the European Union and built within the next two years, added up to 2m euro. "Creation of an effective and safe waste disposal system is important not only for the protection of the environment, but also for the economic development of Kaliningrad Region, which is located in the centre of Europe," Ovillius noted.
Only 1,100 tonnes out of the 6,000 t of the so-called first-class waste are being annually disposed in the region in keeping with the existing requirements. Moreover, Ovillius believes, "some of the wastes could be unlawfully moved to Kaliningrad Region when neighbouring Poland begins to implement the EU standards."
According to deputy head of the Kaliningrad Regional administration, Sergey Laptev, there are now more than 140 garbage and waste dumps on the territory of the region, some of which are very near to cities and villages and to sources of drinking water. The very first stage of the project's implementation envisages the building of three large waste burial grounds, meeting the EU standards, and of a garbage-processing station. Not only foreign grants will be used for this purpose, but also funds from the federal, regional and municipal budgets. "We shall do everything we can to prevent the Russian western exclave from being a blot in Central Europe," Laptev noted.
The new project was developed by the Regional administration with the help of the Northern Investment Bank and the European Bank for Reconstruction and Development. It is a priority investment project in the Northern Ecological Partnership Programme.

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FINANCIAL NEWS

Central bank to encourage long-term investment

The Russian central bank plans to bring about an increase in investor interest in operations on the money market and support long-term investment, Interfax News Agency quoted central bank Deputy Chairman, Konstantin Korishenko, as telling a meeting. "Over the last few months the central bank has been trying to change the situation and carry out active work to attract interest from the currency market to the money market," he said. 
Korishenko said that to develop long-term investment, short-term rates on the money market should be more stable. "We are ready to take on responsibility to ensure that the short-term rates are constant and this will be a stimulus for the development of other rouble instruments and would make investors more inclined towards long-term investment," he said.

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FOOD & DRINK

BBH to pump more than US$200m into breweries

Baltic Beverages Holding (BBH), one of the FSU's leading brewing companies, plans to invest more than US$200m in Russian breweries this year. BBH plans to launch a new brewery in Khabarovsk, to upgrade an existing brewery in Voronezh, and to expand its Baltika breweries in Rostov, Tula and, to an extent, in St Petersburg, Cristian Ramm-Schmidt, the holding's president said, reports Interfax News Agency.
The distribution network will also need some money spent on it, primarily on new warehouses, transport and railcars, said Ramm-Schmidt. BBH controls a third of the Russian beer market and intends to go on increasing this share. "But this must be an organic process, one that is not achieved by acquiring other companies," the holding's president said.
BBH was set up in 1991 by Finland's Harwall Plc and the Swedish-Norwegian Pripps-Ringnes on a parity basis for operations in the Commonwealth of independent States and the Baltic. BBH's Swedish-Norwegian arm is owned by Carlsberg, and its Finnish division by Scottish & Newcastle. BBH controls 15 breweries in the CIS and Baltic States.
In Russia, BBH owns major stakes in the Baltika chain of breweries in St Petersburg, Rostov, Tula and Samara and in the Vena, Yarpivo, Voronezh, Zolotoi Ural and Pikra breweries. These units between them produce more than 200m gal of beer annually.

McDonalds invests over US$25m in 2002

US fast food major, McDonald's, said it invested over US$25m on expanding its chain of restaurants in Russia. McDonald's opened 22 eateries in Russia last year, with 12 in Moscow and the Moscow region, three in Voronezth and one each in Rostov-on-the-Don, Yaroslavl, Novocherkassk, Almetyevsk, Kazan, Naberezhny Chelny and St Petersburg. Russia currently has 94 McDonald's eateries in 27 cities. Everyday they have about 300,000 customers. The company served over 114m customers in 2002, New Europe reported.
McDonald's is developing a new project, opening McCafe coffee houses in its restaurants. The first was opened at the end of last year at the McDonald's on the Arbat. Over US$200,000 was invested in the project.
McDonald's plans to continue its expansion in 2003. Another 20 eateries are due to open this year, including in the new regions of Orenburg, Ufa and Sochi. 

Russia's MVZ buys Calaras Divin

Russia's Inter-regional Winemaking Plant (MVZ) has bought 80% of the stock in Moldavian winemaker, Calaras Divin (Calarasi) for US$3.7m, Interfax News Agency reported. 
The Russian company will be investing US$5m in Calaras Divin, planting 600 hectares of new vines and clearing US$2.5m of the latter's debts. MVZ was the sole contender for the Calaras Divin stock, which went on the auction block last August. It offered US$3m for the stock and pledged to invest US$5m developing production over five years. It also said it would plant 500 hectares of vines for its own raw materials base. Plans called for the debt to be paid off with future company revenues. This did not suit Moldova, which had been figuring on US$6m for the stock. Subsequent negotiations produced agreement on MVZ buying the stock for US$3.7m.

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FOREIGN ECONOMIC RELATIONS

Pakistani leader seeks increase in Russian investment

Pakistan is urging Russia to increase investments in the Pakistani economy. "In the past Pakistan and Russia cooperated effectively in the sectors of metallurgy, energy generation and oil and gas production. We would like Russia to increase investment in those sectors of our economy," Pakistani President Pervez Musharraf said in an interview with ITAR-TASS News Agency and RIA-Novosti on the eve of his departure for Moscow on an official visit.
"Pakistan has already taken advantage of Russia's knowledge and experience, launching a weather monitoring satellite with Russian help. We hope our cooperation in this area will continue," Musharraf said.
"Pakistan has a negative trade balance with Russia. We hope to improve the situation and to increase exports to Russia of our traditional commodities, specifically sports clothes and facilities, medical instruments, leather goods and farm produce."

Russia reports further progress in its WTO negotiations

Russia will sign protocols on reciprocal access to markets within the next two months with a number of WTO members, reporters have been told by the Economic Development and Trade Ministry. According to analysts, this means that Russia has now entered the final phase of bilateral talks on access to markets. Fifty WTO members are currently engaged in such talks with Russia, Radio Russia has reported. 
The country has already coordinated 70 per cent of its positions with its trading partners. The most complex ones remaining are tariffs on a range of agricultural items, furniture, civil aviation technology and vehicles.

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INFORMATION TECHNOLOGY

Windows code opened to Russia

Russia has become the first country to be given access to the original Windows code by the Microsoft Corporation. This will make the Russian Internet segment much less dangerous, primarily, in terms of hacker protection. Every year hackers attempt to break into over 400,000 official government sites, the Russian Mirror has reported.
In compliance with the concluded agreement, the computer giant will grant Russian partners original codes to the WindowsXP operating system, as well as the latest Windows server-2003 system. The latter has not yet even reached the computer market. This will enable Russian experts to work with Microsoft projects in development, rather than products that are already available on world markets. Work on original code analysis started in February and is expected to produce the first results by the end of 2003.
The original Windows code will be granted to countries as part of a worldwide Microsoft programme to increase the security of state enterprises and international organisations. Russia is the first out of the programme's 60 participants to conclude an agreement. Twenty more states are currently negotiating with the computer giant.

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MINERALS & METALS

EU suggests adjustments to Alrosa, De Beers diamond deal

The European Commission has suggested that a diamond trade agreement between Russia's Alrosa mining company and De Beers be adjusted. Interfax News Agency quoted Alrosa, which is based in the Russian internal republic of Yakutia, as saying the European Commission sent a "statement of objections" with respect to the agreement.
By virtue of a trade agreement notified to the European Commission in March 2002, Alrosa agrees to sell to De Beers rough diamonds worth around €800m a year for a period of five years which De Beers will, subsequently, release on the market. EU competition laws require that the EC must approve the deal.
"We attach particular importance to the statement of objections as this document enables the parties to understand more clearly the EC's position with regard to the trade agreement," Alrosa said.
"We are open to further constructive dialogue with the European Commission. We will make every effort to explain all the questions that have arisen to the Commission and discuss remarks made by the Commission, primarily those set forth in the statement of objections," Alrosa president Vladimir Kalitin, said.

Ministry tries to expedite Sukhoi log gold project

Russia may be moving closer to putting the giant Sukhoi Log gold lode in the Irkutsk region up for tender. The Russian Ministry of Natural Resources has amended an earlier approved set of documents related to a tender for the right to develop the lode, which is the biggest on the Eurasian land mass. The ministry said that the amended documents were sent to the Irkutsk administration for its consideration recently, Interfax News Agency reported. They reiterated that the resources ministry intended to have the documents ready and to refer them to the Russian Ministry of Economic Development and Trade for deliberation. After much wrangling, Moscow and the Irkutsk region agreed on the terms for tendering Sukhoi Log in the summer of 2001. But later, the federal government received instructions to consider a "predominantly auction method (rather than tenders) of granting mineral development rights in Russia."
The ministry said it now had full information about Sukhoi Log's resources and the quality of those resources. If preparations go quickly and if sufficient finance is received, the gold deposit could go on stream in 2-2.5 years.
Sukhoi Log has been included in Russia's list of priority innovation project to be delivered in 2003-2004. Sukhoi Log, which is in the Bodaibo district of the Irkutsk region, had its reserves listed in 1977 as just over 1,000 tonnes of gold with ores graded at an average 2.7 g/t for gold.
The ores are also known to contain platinum, palladium and rhodium. The PGM ores are graded at an average 1.45 g/t for platinum, the riches ores being graded at 2.42 g/t.
Potential bidders include Canadian majors, Barrick Gold and Placer Dome, the multinational Rio Tinto and Russia's Lanta Bank, which owns shares in three enterprises mining gold lodes in the Irkutsk region. Russia's Norlisk Nickel, Lenzoloto and MNPO Polimetall and Britain's Fleming Family & Partners (FFP) have also said they might bid.

Russian diamonds now Middle East's best friend

Meetings for a sensational US$500m deal between Russia and Lebanon, challenging diamond giant De Beers' market share, have been secretly held in Moscow, a source revealed, the Russian Mirror reported.
Russian diamond monopolist, Alrosa, has reportedly been discussing a possible partnership with the Lebanese Horizon Development Company, a deal that would see the sale and marketing of uncut and cut diamonds in the Middle East.
With an annual market for the precious stones expected to reach US$500m, the Arab world could become a real alternative to De Beers, the principal purchaser of Russian diamonds and an organisation whose operation is keenly scrutinised by European commission for potential violations of anti-monopoly laws.
The Russo-Lebanese deal was supposedly broached during a visit to Moscow made by the Horizon Development management on January 8-12th this year. The delegation was led by Bahaa R Al-Hariri, son of the Lebanese Prime Minister.
Plans involving Alrosa are thought to include the establishment of a network in the Middle East for the sale of Russian diamonds, and a joint cutting enterprise, along with direct supplies of diamonds.
Horizon Development is part of the Hariri Group controlled by Lebanese multimillionaire and Prime Minister, Rafik Hariri, which operates in Lebanon, Saudi Arabia, Bahrain, Egypt, the AE and Kuwait, with a US$2bn annual turnover.
In early January, Bahaa R Al-Hariri visited Gokhran (the state depository of precious stones and metals) and met its head Vladimir Rybkin. Rybkin acknowledged the possibility of co-operating with Lebanese jewel cutters, as well as delivering to Lebanon diamonds from the State Fund. 
Some Finance Ministry sources believe a corresponding agreement worth hundreds of millions of dollars could be signed soon.
The deal, should it go through, could see Alrosa break its ties with De Beers, which currently receives US$800m worth of diamonds a year from Russia since signing a European trade agreement on December 17th, 2001.
Alrosa itself considers the treaty with the Lebanese extremely promising in view of the European Commission's drawn-out consideration of the De Beers deal. 
Alrosa first Vice president, German Kuznetsov, acknowledges his company is looking for new markets for diamond sales: "For us, the Middle East is a relatively new and extremely promising region, and we are entering this market via Beirut, traditionally regarded as the gate to the Orient."

Russian companies post small rise in steel production in 2002

Russian companies produced 59.8m tonnes of steel in 2002, up 1.3 per cent on the year, the State Statistics Committee said on 4th February, Prime-TASS News Agency has reported.
Below is a breakdown of selected output in the industry for 2002, as provided by the committee:
Ferrous rolled stock: 48.7m tonnes - up 3.9 per cent; oxygen-converter steel: 36.7m tonnes - up 6.2 per cent; electric steel: 8.9m tonnes - up 0.2 per cent; and steel pipes 5,115,000 tonnes - down 5.4 per cent.
The amount of iron ore mined in 2002 rose 1.7 per cent on the year to 84.2m tonnes.

Russian metals giant expects higher world demand for palladium

The key strategy of Russian metals giant, Norilsk Nickel, for 2003 remains unchanged from last year and envisages direct long-term contract supplies of all Norilsk Nickel's metal output, deputy chief executive officer Maksim Finskiy told Prime-TASS News Agency in an exclusive interview.
Finskiy said that the company successfully completed this goal in 2002 and as a result the share of long-term contracts for base metal supplies increased to 80 per cent of all contracts.
The number of long-term contracts for precious metal supplies also increased last year, including expansion into the Japanese market, he added without providing exact figures... High demand and constantly rising platinum prices are compelling consumers to switch to similar metals such as palladium, which costs US$270 per ounce, Finskiy said. The price gap is obvious, while the chemical and physical composition of the two metals is similar, he noted.
"The process of switching to another type of metal in production takes a long time, but we expect it to happen in a year/year-and-a-half's time, as producers have accumulated enough experience in the adoption of new metals," Finskiy said. 
Thus Norilsk Nickel expects considerable growth in demand for palladium in 2003, Finskiy said. Meanwhile, Norilsk Nickel plans to sell palladium on spot markets in 2003 only if it needs to stabilize the market, he added.
The company is interested in keeping prices for metals stable, he noted.

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SCIENCE & TECHNOLOGY

Moscow winter gets the Dead Sea treatment

Russian specialists have created a unique device, which they call 'Artificial Sun.' One way or another, for six months, people do not get enough solar energy on the Moscow longitude. Drowsy and irritable Muscovites are left to try to improve their health through massages, swimming and tanning sessions in solariums. These procedures are certainly useful, but they cannot replace the natural effectiveness of the sun's rays, the Russian Mirror reported.
There are two things that traditionally prevent the use of solar rays in the treatment of many diseases: namely ultraviolet rays, which are dangerous in certain cases, and the possibility of over-heating.
However, these problems were, by and large, successfully resolved in the 1960s when Russian engineer, Mikhaill Bukhman devised his "hyperoloid gun." This gigantic device was 3.5 metres in diameter and was composed of an array of mirrors capable of concentrating the light and sending it in a single beam. The devices, called "Bukhman's reflectors," were installed in the Alma-Ata sanatorium and in the Sochi resort's main sanatorium.
Heliotherapy using the reflectors was very popular for a time, but there remained a number of disadvantages. The brains behind the Artificial Sun project, specialists at "The Dead Sea in Moscow" medical centre, which worked under the Scientific Research Institute of Rheumatology, have now managed to restore the method at a new, modern qualitative level.
The centre's Director, Dr Sergei Yarmonenko has this to say: "Our main task was to obtain a reliable source of solar light. In order to create the heliotrope (apparatus) we needed to pick the brains of software engineers, lighting engineers and military and industrial technicians. Without going into great technical detail, I can say that we managed to remove the risk of ultraviolet radiation, by cutting off its direct impact on the body.
"We are now able also to treat patients suffering from various cancers. The power of our "Sun" can be compared with the spectrum of the sun over the Dead Sea, that is approximately 1.2 million candle-metres. A concentrated flow of photons of visible and infra-red radiation is applied at the correct power; it is a method patented as helio-thermotherapy, or solar massage, as the patients come to call it.
"Thus, we are able to reproduce the three main elements of the Dead Sea's effect - sun, water and mud. Helio-thermotherapy is most effective for the treatment of problems in the muscle and bone system, ulcers, skin lesions and lung disease. The treatment also offers a curative effect for depression and fatigue. Children undergoing the course of treatment have been observed to grow physically stronger with strengthened immunity to colds and diseases."

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SHIPPING

Russia planning new strategic missile submarines this year

The Russian ship-building industry will work on new strategic missile submarines in 2003, the First Deputy Director General of the Russian Ship-Building Agency, Lev Klaychko, said in a report on the Russian government Web site. "Our industry's priorities include, in the first instance, the design of new strategic missile submarines, sub modernisation and repairs, further construction of multi-purpose nuclear-powered submarines of the fourth generation, and completion of the construction of the first diesel-powered submarine of project 677," Klyachko said.
This year the industry will continue the construction of three frigates at the Baltic plant, two destroyers at the North shipyard, a project 20380 patrol ship and mine-sweepers at the Sredne-Nevsky plant, and a number of other ships, cutters and vessels for the Navy and the Federal Border Service. "Bearing in mind the national significance of foreign economic relations, especially military-technical cooperation, the industry will focus on the construction of Zubr project hovercraft, submarines, destroyers and other vessels for foreign clients," Klyachko said.

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SPECIAL ECONOMIC ZONES

Ratification of special economic zones law at hand

A law on special economic zones may be passed this year, Russian Minister for Industry, Science and Technology, Ilya Klebanov, told a meeting with management from France's Renault and the French-Russian joint venture Avtoframos. "Based on the law on special economic zones which, we think may be passed this year, we plan to set up several special economic zones for the production of automobile components exclusively," Interfax News Agency reported. 
Klebanov promised that the Industry, Science and Technology Ministry "will provide support for the development of a network of domestic suppliers of automobile components." Andrei Mazurov, the ministry's public relations director, said the French side has expressed interest in increasing production in Russia of components for foreign cars being produced in the country. He said, "The French side has supported efforts by the Russian government and the Industry, Science and Technology Ministry to implement a concept for the development of the automobile industry, aimed at establishing a civilised market in Russia with the same rules for all market participants and also creating favourable conditions for investors willing to work on the Russian market." "The Russian government and the Industry, Science and Technology Ministry are taking the correct route: we need to create better conditions for investors and not for importers," Renault Vice President, Georges Douin, said at the meeting. 
Renault management has again confirmed its readiness to work in Russia and to set up production of up to 60,000 automobiles per year over several years, with investment of about US$250m. Avtoframos representatives said at the meeting that they have decided on which car model they will produce in Russia, but nevertheless they did not name the model. Avtoframos restarted production of Renault automobiles in autumn of 2002. The joint venture is involved only in the assembly and sale of automobiles - the bodies, engines and components are supplied from abroad. 

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TRANSPORT

New road to make it possible to drive from one end of Russia to the other

This year, for the first time in Russia's history, it will be possible to drive through the whole country by road - from the western borders to the Far East. In order for this to happen, the Chita-Khabarovsk highway has to be completed. Vladimir Voropay reported for Channel One TV from Amur Region:
The possibility of driving by road from a state's western border to the eastern is considered to be an essential attribute of a civilized country. In Russia, the possibility of travelling from the shores of the Baltic Sea through to the Pacific Ocean will arise only this year.
The new highway goes from the western outskirts of Chita to the bridge across the Amur near Khabarovsk. The distance between these points is 2,165km. The construction of the road began back in the 1960s, although most of the road has been laid over the last few decades. About 400 km remains to be built. The road is not being constructed in the normal way - from both directions - but throughout its whole length at the same time...It grows by approximately one kilometre every working day... Work goes on round the clock and every day...
According to the experts, the new highway will impart a substantial impetus to the economic development of the Far Eastern territories. The construction of the federal highway will be completed in full in 2008.

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